U.S. commercial real estate woes continue to grow

U.S. commercial real estate woes continue to grow
Crippling » Just in the past year, delinquency rates have doubled on loans

By Alan Zibel, AP Real Estate Writer
Salt Lake Tribune
Updated:07/09/2009 06:47:12 PM MDT

Owners of shopping malls, hotels and offices are defaulting on their loans at an alarming rate, and the commercial real estate market is not expected to hit bottom for three more years, industry experts warned Thursday.

"The commercial real estate time bomb is ticking," said Rep. Carolyn Maloney, D-N.Y., who heads the congressional Joint Economic Committee.

Delinquency rates on commercial loans have doubled in the past year to 7 percent as more companies downsize and retailers close their doors, according to the Federal Reserve. Small and regional banks face the greatest risk of severe losses from commercial real estate loans.

Total losses in securities backed by commercial property loans could be as high as $90 billion in the coming years, according to Deutsche Bank analyst Richard Parkus. He says even more losses -- up to $140 billion -- are expected from construction loans made by regional and local banks, rather than those sold as securities held by investors.

"We believe the bottom is several years away," Parkus told lawmakers.

The commercial real estate market's fortunes are tied closely to the economy, especially unemployment, which hit 9.5 percent in June. As people lose their jobs, or have their hours reduced, they cut back on spending, which hurts retailers, and take fewer trips, which hits hotels.

Funding for commercial loans virtually shut down last year as the financial system unraveled. Industry executives say financing is still extremely difficult to obtain, even for financially healthy properties.

The pain is already spreading through the economy. In April, the second-largest owner of shopping malls in the nation, General Growth Properties Inc., buckled under $27 billion in debt and filed for Chapter 11 bankruptcy protection.

And GE Capital, the financial arm of the conglomerate General Electric Co., has seen its profits from commercial real estate snuffed out in recent quarters.

It went from making $476 million in the 2008 first quarter from its portfolio of office buildings, retail centers and manufacturing facilities to a loss of $173 million in the first quarter of this year and warned that losses on its commercial real estate loans and property holdings could reach $6 billion this year.